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WASHINGTON, DC-Demand for multifamily in the DC area–particularly class B multifamily–is weaker than usual thanks to an alternative shadow market that has gotten stronger as the housing market declined. According to Delta Associate’s Q3 report on multifamily trends in the area, vacancies here are 2.7% versus 1.4% a year ago. This is still a very respectable number, researcher and report author Grant Montgomery tells GlobeSt.com.

“It is half that of the national average, which is currently 5.6% to 5.8%,” Montgomery says. The vacancy rate, though, coupled with a sharp decline in rental growth–rents have only risen by half a percentage point over the last 12 months–points to a less than smooth year ahead for apartments.

For the moment, class B apartments are receiving the biggest hit. At 3,865 units, class A absorption for new projects has held up well over the past 12 months, Montgomery says. Class B units, though, disabsorbed about 3,100 in the past 12 months, for a net gain of 727 units.

The culprit–at least in the eyes of apartment owners–is the supply of alternative product that has come onto the market. This includes homeowners that have not been able to move their houses and condo owners that bought either to rent or to flip. “There are more options for renters. The demand is still there in DC–it is a strong market. But that demand is seeping into non traditional sources of supply.”

Meanwhile, traditional supply is very strong. Indeed, industry watchers are bracing themselves for an expected glut of units coming onto the market over the next three years. According to Montgomery, 33,749 units are expected to deliver in the next 36 months. “Two years ago that number was 18,000.”

Despite the clear mismatch between demand and supply, Montgomery says the situation will be temporary. “This phenomenon will play out over the next three quarters and absorption will then get back up to the long term average,” he predicts.

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